The East African Community (EAC) has set this year as the deadline for partner states to sign and ratify a regional agreement on double taxation, seeking to reduce double charges on exports and imports.
It means all member states should have signed the EAC Agreement on the Avoidance of Double Taxation by end of the year.
Double taxation agreements (DTAs) are part of plans to harmonise taxes, a major barrier to cross-border investment flows. Where DTAs do not exist, investment income sourced in one country is often taxed by the country of residence and the home country of the investor.
DTAs allow individuals and businesses from one country residing in another country to be taxed only once in each country for the same income.
“We had these multilateral agreements on double taxation that was signed in 2010 and they were to be ratified by partner states,” said Dr Pantaleo Joseph Kessy, Principal Economist at EAC Secretariat, during the webinar to harmonise taxes in the East African region.
Reluctance to ratify
“Unfortunately, one partner state did not ratify and now it has been too long. The partner state is now ready to ratify but we felt we should backdate the provisions of the DTA to take into account the changes that have taken place in the ten years.”
The official said DTAs with all partner states should be ready and be adopted as a region.
The EAC Agreement on the Avoidance of Double Taxation was signed in November 2010, and was first ratified by Uganda and Rwanda.
But some of the EAC Partner States including Kenya, Tanzania and Burundi were reluctant to ratify the same due to fears of loss of revenue and tax evasion. By December 2022, only Tanzania was yet to ratify.
The DTA ratification is part of a larger scheme by the EAC to harmonise all taxes by the end of 2024 and achieve a single currency by 2031.
“There is a roadmap for the establishment of a single currency in the region. Harmonisation of domestic taxes is one of the taxes that are to be implemented in that roadmap,” said Dr Kessy.
Generally, the EAC Double Tax Treaty is a key tool for elimination of double taxation and prevents double non-taxation, tax evasion or aggressive tax planning/avoidance.
“We are happy that the EAC Council of Ministers has provided a roadmap by 2025 that we need to have completed this exercise. The involvement of the private sector is very critical,” said John Kalmias, the CEO of the East African Business Council.
“Double Tax Agreements are very important in the region as it promotes cross-border investment through minimisation of tax obstacles among the treaty countries and prevention of cross-border tax avoidance. Therefore, the EAC Double Tax Treaty is an important instrument towards harmonisation of taxes across the region.” he said.
Kalmias also added the DTA was also important in ensuring portability of social security within the EAC and it was seeking to maintain the status quo regarding distributions.
For instance, pensions, annuities, and social security payments arising in an EAC partner state and paid in consideration of past employment to a resident of any other state within the EAC is taxable only in the state in which the payment arises.
“In circumstances where the payment is made by a resident of any of the other EAC state or a permanent establishment situated therein, it may be taxed in any of the other states save for national/state contributions which are only taxable in the state which they are made,” said Sabato Mwaliki, KPMG Tax Manager, during the release of the draft report on harmonisation of Domestic taxes in the EAC region.
DTAs will also provide the legal basis for the protection of taxpayers against direct and indirect double taxation.
They also protect investments against non-commercial risks such as nationalisation, confiscation, foreclosures, freezing of assets, creation of authorised investments and transfer of profits and income in convertible currencies.
Double taxation agreements create a legal framework allowing tax authorities to cooperate without violating the sovereignty of other countries or the rights of taxpayers.